Economy of Cyprus

Economic affairs in Cyprus are dominated by the division of the country into the southern area, controlled by the internationally recognized government of the Republic of Cyprus, and Turkish-occupied northern Cyprus.
Classified by the World Bank as a high-income economy, Cyprus was included by the International Monetary Fund in its list of advanced economies in 2001. Erratic growth rates in the 1990s reflected the economy's vulnerability to swings in tourist arrivals, caused by political instability on the island and fluctuations in economic conditions in Western Europe. On 1 January 2008, the country entered the eurozone and adopted the euro as its official currency, replacing the Cypriot pound at an irrevocable fixed exchange rate of CYP 0.585274 per EUR 1.00.


Investment climate


In February 1997, the government revised its policy on foreign direct investment, permitting 100% foreign ownership in certain cases. Regulations on foreign portfolio investment in the Cyprus Stock Exchange have also been liberalized. Additionally, Cyprus passed a modern banking law in July 1997, incorporating all the provisions and directives of the EU for the prudential supervision of credit institutions.
Cyprus has concluded treaties on double taxation with 26 countries, and has removed exchange restrictions on current international transactions. Non-residents and foreign investors may freely repatriate proceeds from investments in Cyprus.


Economy in the Turkish-occupied area


The economy of Turkish-occupied northern Cyprus is about one-fifth the size of the economy of the government-controlled area, while GDP per capita is around one-third. Because the de facto administration is recognized only by Turkey, it has had much difficulty arranging foreign financing, and foreign firms have hesitated to invest there. The economy mainly revolves around the agricultural sector and government service, which together employ about half of the work force. The tourism sector also contributes substantially into the economy. Moreover, the small economy has seen some downfalls because the Turkish lira is legal tender. To compensate for the economy's weakness, Turkey has been known to provide significant financial aid. In both parts of the island, water shortage is a growing problem, and several desalination plants are planned.
The economic disparity between the two communities is pronounced. Although the economy operates on a free-market basis, the lack of private and government investment, shortages of skilled labor and experienced managers, and inflation and the devaluation of the Turkish lira continue to plague the economy.
Turkey is by far the main trading partner of the Turkish-occupied area, supplying 55% of imports and absorbing 48% of exports. In a landmark case, the European Court of Justice (ECJ) ruled on 5 July 1994 against the British practice of importing produce from northern Cyprus based on certificates of origin and phytosanitary certificates granted by the de facto authorities. The ECJ decided that only goods bearing certificates of origin from the internationally recognized Republic of Cyprus could be imported by EU member states. The decision resulted in a considerable decrease of Turkish Cypriot exports to the EU: from $36.4 million (or 66.7% of total Turkish Cypriot exports) in 1993 to $24.7 million in 1996 (or 35% of total exports) in 1996. Even so, the EU continues to be the second-largest trading partner of northern Cyprus, with a 24.7% share of total imports and 35% share of total exports.
Assistance from Turkey is the mainstay of the Turkish Cypriot economy. Under the latest economic protocol (signed 3 January 1997), Turkey has undertaken to provide loans totalling $250 million for the purpose of implementing projects included in the protocol related to public finance, tourism, banking, and privatization. Fluctuation in the Turkish lira, which suffered from hyperinflation every year until its replacement by the Turkish new lira in 2005, exerted downward pressure on the Turkish Cypriot standard of living for many years.
The de facto authorities have instituted a free market in foreign exchange and permit residents to hold foreign-currency denominated bank accounts. This encourages transfers from Turkish Cypriots living abroad.